Warp-speed trades outpace SEC

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A stock market crash brought on by a screwup in computer networks could cause unforseeable damage.
Reuters

That’s because the regulators, by their own admission, are still living in the age symbolized by those cable business news anchors who sit above the floor of the New York Stock Exchange, screaming to be heard as though they were in the nerve center of the markets, which they’re not.

While the NYSE executed approximately 79.1 percent of the consolidated share volume in January 2005, according to the SEC, by October 2009, the proportion was down to 25.1 percent.

By the SEC’s count, trading volume is now spread across more than 240 platforms in addition to the major exchanges, including many that don’t display information, such as so-called dark pools and internal broker-dealer trading operations.

“Much as Sun Microsystems has popularized the notion that ‘the network IS the computer,’” he says, “I have been trying to make the point that ‘The network IS the market.’”

And talk about speed.

Bryant Urstadt, in an article titled “Trading Shares in Milleseconds” in MIT’s Technology Review, recently profiled a company called Tradeworx and its CEO, Manoj Narang.

It described trading decisions “acted on at near light speed by computers running preprogrammed algorithms.”

Urstadt quoted Narang: “Actually, we run two businesses. The first trades in and out of shares in about a second and holds them for an average of two or three days. That’s the medium-speed fund. The high-speed fund could make thousands of trades a second and holds them for a matter of minutes.”

“By the end of the day,” Urstadt wrote, Narang’s “computers will have bought and sold about 60 million to 80 million shares, with the heaviest activity in the last hour of trading, from [3 p.m. to 4 p.m.].”

According to Angel, “most of the time, this market network works better, faster and cheaper than ever before.” But “large complex systems sometimes fail in unexpected ways.”

The SEC’s proposals — the circuit breakers and a “consolidated audit trail” for tracking trades — “are not going to fix the underlying problems,” Angel said in an interview. “They’ll deal with symptoms. The next time we have a glitch, it will help prevent further damage.”

It isn’t simply the lack of adequate data and technology that plagues the SEC, Angel says. It’s a growing “ivory tower” isolation from the actual workings of the market and the people who trade, so that even if the regulators had the data, they would most likely not understand it.

Readers' Comments (3)

Hmmmm. National governments led by the profligate Obama administration are like teenagers with the national credit card spending trillions that the adults will eventually have to pay back. Political driven huge government non-profits (apparently aggressively non-profit :-) like FannieMae and FreddieMac facilitating trillions of bad investments. The Fed pumping trillions of unbacked dollars into the economy that can only come back as inflation sooner or later. The banks so over-leveraged that an economic downturn causing a few percent of failed debt repayments completely wipes out their capital - making them brittle at best and unable to lend any more at current. High speed trading for fractional penny profits wiping out the Market Makers so that an Accenture can drop to a penny a share in half an hour. And the whole global economic system so interconnected and so much on the edge of panic that financial mismanagement by a tiny irresponsible Mediterranean country can collapse the global markets in minutes. Whats to worry about?

“In the worst-case scenario,” they write, “a computerized trading system at a large brokerage firm sends a large number of erroneous sell orders in a large number of stocks, creating a positive feedback loop through the triggering of stop orders, option replication strategies and margin liquidations. In the minutes it takes humans at the exchanges to react to the situation, billions of dollars of damage may be done.”

Don't worry, There's about as much a chance that Hackers would attempt this as China, Russia and other nations attempting to access out computer sysytems.

National governments led by the profligate Obama administration are like teenagers with the national credit card spending trillions that the adults will eventually have to pay back.

This shows that our markets are now just a check to see if a programmer did his job right.. If he did, he and his company get loads of cash, if he didn't and he misplaced a zero (think Office Space), there goes our retirements. Mmmm-kay